Standard & Poor's junked San Fernando, Calif.'s redevelopment agency bonds, lowering them to BB-plus from BBB-plus.
The rating agency also removed the successor agency's bonds from CreditWatch with negative implications but gave the bonds a negative outlook.
"We had put about 500 unique credit ratings on watch for possible downgrade in July 2012 after the passage of AB1484, [clean-up legislation to the state's redevelopment agency dissolution law that took effect in February 2012]," said Sussan Corson, an S&P analyst. "We have resolved about 90% of those ratings."
The vast majority of the ratings were affirmed and the outlook was revised to stable, Corson said. About 4% were downgraded, and analysts still have 10% to resolve, she said.
Of the 18 credits that were downgraded, typically it was related to a drop in assessed value, true-up provisions in which the state kept the funds, a diversion of tax increment revenue from the redevelopment property tax trust funds, or cash management issues, she said.
San Fernando was downgraded because money has been diverted from the property tax trust fund and because of cash management issues, Corson said.
"There have been some changes to the way some counties are depositing certain taxable revenues, which has changed the calculation for some pledged revenues," Corson said.
In San Fernando's case, the money is not going directly into the reserve fund to make the payments, she said.
The city of 23,000 also has a plan to pay the interest payment on the bonds due March 15, but not the larger principal-plus interest payment due on Sept. 15, she said. The city's total payment for 2013 is $1.6 million on the bonds issued in 2006 partly to fund construction of an aquatic center.
The city also didn't get a disbursement from Los Angeles County at all in January, because the county believes it overpaid the agency in previous periods, Corson said.
The rating agency could raise the rating if the city works out the dispute with the county, or if something else occurs to improve the city's situation, she said.
The city's auditors, Teman, Ramirez & Smith Inc., a Riverside-Calif.-based accounting firm, also raised concerns in the comprehensive annual financial report for the year ended June 30, 2012 about the city's lack of liquidity, resulting in a $1.2 million general fund deficit and $2 million special revenue fund deficit.
"The lack of liquidity in the general fund and grants special revenue raise substantial doubt about the ability of the general fund and grants special revenue to continue as going concerns," the auditors said.
The city plans to continue to freeze positions as they become vacant and is trying to re-open negotiations with city employees to right city finances, according to the report. It eliminated 12 positions through attrition and layoffs in 2012.